May an employer design a plan with no payout until normal retirement age?

An employer’s § 401(a)-(k) plan would have these provisions:

Elective deferrals, up to § 402(g) and § 414(v) limits

Safe-harbor matching contribution—100% on first 3% and 50% on next 2%

Safe-harbor notices; no restraint on opportunity to elect a deferral from pay not yet available

No participant loan; no hardship or other early-out distribution

No small-balance ($7,000) involuntary distribution.

No distribution until end of service and normal retirement age (65 or the latest permitted).

Considering those plan-design elements:

Does anything about the absence of ways to get money before normal retirement result in the plan losing a safe-harbor treatment for excuses from ADP and ACP tests?

For States’ laws that call an employer to maintain a retirement plan or facilitate payroll contributions to Individual Retirement Accounts, is the plan described above sufficient to avoid the State’s arrangement?

A plan can allow for no distribution prior to normal retirement age. Though I believe that's much more common in a DB plan with annuity only options. I don't see why you couldn't do it in a safe harbor 401(k) Plan, but I'm not sure you should do it.

Thanks. I don't advocate the design. My scope is about whether the design meets the two purposes I mentioned. And I'll advise about disadvantages.

I agree that this plan design is permissible.  The safe harbor rules do not impact and are not impacted by the normal retirement date.  If the State has a requirement that the employer must maintain a retirement or acceptable alternative, this plan design is a retirement plan.  While we are at it, why not add auto-enrollment and auto-escalation and no EACA withdrawals?  You also could add in rollover in and keep those to NRD.

Over time, the plan proportion of terminated vested participants very likely will accumulate to be greater than the proportion of active participants.  The plan will have the burden of providing all of the required disclosure to these terminated participants (SH notice, SPD, SAR, QDIA notice, 404(a)(5) notice...). 

The accumulation of participants with account balances very likely will push the count of participants with account balances beyond the threshold for requiring an audit (keeping in mind that the deferrals and safe harbor are both 100% vested).

There likely will still be payments other than retirement benefits for QDROs and death benefits.

Autoportability is off the table since it now pretty much relies on the benefits being distributable.

If the plan is going to hold the account balances until NRD, then it should at least allow for the contributions to be made as Roth contributions.

I expect that our BenefitsLink colleagues who have read this far are cringing at the thought of such a plan.

I always imagined if I had my own company I'd make the plan as legally unappealing as possible for the staff - pooled investments, no ISW or loans, QJSA requirements, no payout until 65+5....and then I'd do the triple-stack match nobody would want to sign up for 

Paul I, thank you for noting some difficulties.

The employer believes communicating that there is no payout until 65 will result in few of its low-wage workers choosing elective deferrals, so lowering the employer’s obligation for matching contributions.

Yet, providing the safe-harbor allows each executive to save her $30,500.

I’ve told the employer that the communications go to all eligibles, including those with no account balance.

The employer knows that the business or the few with-balances participants will pay for the independent qualified public accountant.

The plan would allow Roth contributions.

I recognize that the employer’s plan design focuses on the employer’s business purposes, and dissuades workers who might save if the plan would allow some before-retirement access. I’ll advise considering more openness. But I also can be mindful that the employer, not me, bears the burdens of managing its challenging business.

I am curious to hear how the sponsor will manage automatic enrollment. Automatic enrollment thrives on inertia/inaction. Is someone going to sit down with each person as they become eligible and have them fill out a zero election form? Seems like a lot of work, but maybe the trade off is worth it to them. 

Make sure the owners know that the no pre-65 distribution rule also applies to them as well as any "executives" then might hire.

justanotheradmin, thank you for your helpful observation.

The plan was established before 2022, so an automatic-contribution arrangement is not a tax-qualification condition.

The evaluation now is about amending the plan to get rid of a hardship distribution, and a distribution on severance or age 59½.

Lou S., the owners, and the few executives who are not also an owner, all are old enough and mature enough that being constrained until age 65 is no worry for them.

Oh that's different. I don't recall if hardship is a protected benefit, you may or may not be able to amend that out, but if the Plan has in service at 59 1/2 and/or severance of employment already you'll need to preserve that for all current participants at least for funds currently in the plan and any earnings thereon or you'll have a prohibited 411 cutback. Accounting for pre and post amendment balances by source for all participants seems a nightmare and just asking for trouble. Oh and then telling folks that some of their is available when they terminate and the rest when they turn 65? That sounds like a fun conversation.

Yup, preserving the before-amendment rights is a pain-in-the-assets.

Would there be a problem with balances (of terminated participants) under $1000?

Except for a required distribution at 70-something, the plan has no involuntary distribution; there is no such cash-out (whether for $1,000 or another amount).

Is there a benefits, rights, and features issue if over time the only people who can really access their money are the HCE? 

Hardship is not protected, but a general 59 1/2 in-service distribution and a distribution available upon severance are protected and can not be eliminated with respect to account balances attributable to contributions through the date of amendment. So every existing active participant would have a pre and post amendment account for every money type and fund investment - someone with 401(k), match and 6 elected funds now has 24 buckets to track instead of 12. 

This would be a recordkeeper nightmare, not to mention the potential for LOTS of missing participants who haven't been employed there for ages - which could become an invitation for DOL scrutiny.

justanotheradmin, thank you for helping me think thoroughly.

“Based on all of the relevant facts and circumstances, the group of employees to whom a benefit, right, or feature is effectively available must not substantially favor HCEs [highly-compensated employees].” 26 C.F.R. § 1.401(a)(4)-4(c)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-4#p-1.401(a)(4)-4(c)(1).

But doesn’t that effective-availability concept refer to the right the plan provides?

What the plan provides is a right to a distribution on having a severance-from-employment and having reached normal retirement age. That right is provided uniformly to highly- and nonhighly-compensated participants.

Whatever expectation a participant had regarding before-amendment provisions is protected under the anti-cutback rule.

I see that “the timing of a plan amendment . . . [could] ha[ve] the effect of discriminating significantly in favor of HCEs or former HCEs[.]” 26 C.F.R. § 1.401(a)(4)-5(a)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-5#p-1.401(a)(4)-5(a)(2).

Whether it so discriminates “is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances.”

CuseFan, that some former employees neglect to update email, postal-mail, and telephone addresses might not be too big a problem if, as the employer believes, few low-wage workers will elect deferrals under the after-amendment provisions. Also, when an individual turns 65, she’ll get the Social Security Administration’s you-may-have-a-benefit letter, which directs its addressee to the employer/administrator.

About the many subaccounts, I know the employer/administrator would need to negotiate its recordkeeper’s services, and that it might lack enough bargaining power.

I concur with everyone that the employer’s plan design challenges the plan administrator’s responsibility and the recordkeeper’s services.

As I mentioned, I don’t advocate the design. But BenefitsLink neighbors’ cautions help me volunteer cautions beyond the two questions I was asked.

This does not address Peter's questions, but an employer's possible mindset.  When I started in this business, my area had a heavy concentration in the tool and die industry.  Most tool and die business owners sponsored profit sharing plans with a paired money purchase plan and made healthy annual contributions.  The owners started getting annoyed with their 20-year employees, who were generally only in their early 40's, quitting and taking their retirement plan account balance, and starting a competing tool and die business.  They knew the customers, they knew the pricing, and they would buy one machine with their distribution and try to take business from the employer where they had just quit.  

The tool and die owners got together, and they all decided to amend their plans to only allow for all distributions at age 65.

And provide the retirement distribution as nonannuity payments over 14 years?